Feb. 19, 2015

Simmons & Simmons, PwC and Advise Technologies Share Lessons Learned from January 2015 AIFMD Annex IV Filings (Part One of Two)

Many hedge fund managers made their first AIFMD Annex IV filing in January 2015.  The process involved, among other things, construing and applying authority, collecting and organizing relevant data, drafting and revising the form, interacting with regulators, filing in multiple jurisdictions and correcting errors.  The process generated questions – many of them – ranging from the arcane to the mundane.  At a high level, managers wondered (and still wonder) how regulators will use Annex IV data.  Will they, for example, use the data to target manager examinations or as ammunition in enforcement actions?  At a more practical level, managers contended with missing national codes, non-working log-ins and validation errors.  Somewhere in the middle of the policy-to-particulars spectrum were a series of unique data calculation questions, for example, on how to calculate leverage and link cash borrowings to investments.  In short, in the world of AIFMD, January 2015 was a “teachable moment.”  Recognizing as much, the Hedge Fund Law Report and Advise Technologies, LLC sponsored a panel discussion yesterday that memorialized the more important lessons from January 2015 Annex IV filings.  The program featured representatives of three disciplines: Simon Whiteside, a partner at Simmons & Simmons LLP, on regulators and reporting obligations; Stefanie Kirchheimer, a director at PricewaterhouseCoopers, on data, calculations and interpretations; and Jeanette Turner, Managing Director and General Counsel at Advise Technologies, LLC, on filing logistics and technical issues.  HFLR Publisher Mike Pereira moderated.  This article – the first in a two-part series – summarizes the key insights from the panel with respect to reporting obligations, data, calculations and interpretations.  The second article in this series will address filing logistics, technical issues and clarifications from regulators.  See also “HFLR-Advise Technologies Panel Explores AIFMD Marketing and Annex IV Reporting Requirements,” Hedge Fund Law Report, Vol. 8, No. 2 (Jan. 15, 2015); “Key Pain Points in AIFMD Annex IV Reporting and Proven Strategies for Surmounting Them,” Hedge Fund Law Report, Vol. 7, No. 44 (Nov. 20, 2014).

Tax Practitioners Discuss Taxation of Options and Swaps and Impact of Proposed IRS Regulations

The IRS is nudging hedge funds and other market participants toward mark-to-market accounting for many swaps and other derivatives.  Some rules, such as those for Section 1256 contracts, are already in place, while other regulations are in the works.  At a recent presentation, leading tax practitioners offered an overview of the current regime of taxation of swaps and options and insights into how proposed IRS regulations may affect that regime.  See also “Tax Practitioners Discuss Taxation of Swaps, Wash Sales, Constructive Sales, Short Sales and Straddles at FRA/HFBOA Seminar (Part Four of Four),” Hedge Fund Law Report, Vol. 7, No. 5 (Feb. 6, 2014).

RCA Compliance, Risk and Enforcement 2014 Symposium Highlights SEC Exam Priorities and Focus Areas, Mitigating Regulatory Filing Risk and Key AIFMD Issues for Non-E.U. Managers (Part One of Two)

Hedge funds are subject to regulatory scrutiny, and enforcement actions against managers have been increasing in frequency and sophistication.  Hedge fund managers therefore need to ensure compliance with the ever-growing panoply of regulations to which they are subject; and registered managers need to prepare for routine and other examinations by regulators.  In order to assist managers with these aims, the Regulatory Compliance Association held its Compliance, Risk and Enforcement 2014 Symposium in New York City.  This article, the first in a two-part series, summarizes the panelists’ discussion on the NFA’s and SEC’s risk-focused tools and technologies; the SEC’s 2015 examination and enforcement priorities; and preparing for SEC examinations.  The second article in the series will cover risks associated with regulatory reporting and emerging AIFMD issues.  See also “How Do Regulatory Investigations Affect the Hedge Fund Audit Process, Investor Redemptions, Reporting of Loss Contingencies and Management Representation Letters?,” Hedge Fund Law Report, Vol. 8, No. 3 (Jan. 22, 2015).  In April of this year, the RCA will be hosting its Regulation, Operations and Compliance (ROC) Symposium in Bermuda.  For more on ROC Bermuda 2015, click here; to register for it, click here.

Citi Survey Finds Large Drop in Hedge Fund Profitability from 2013 to 2014, Highlighting the Importance of Management Fee Revenue and Its Impact on Product Strategy and Management Company Valuations (Part Two of Two)

Citi Business Advisory Services recently issued the results of its 2014-15 Annual Hedge Fund Operating Metrics Survey (formerly called The Hedge Fund Business Expense Survey), which focused on hedge fund management fee revenues, operating expenses, operating margins, performance fee income and overall profitability.  In this article, the second of two, we summarize Citi’s findings on the growing importance of management fees for hedge fund managers and how a manager’s product mix may affect both its profitability and its valuation.  The first article covered Citi’s methodology, survey demographics and findings with regard to hedge fund profitability in both 2013 and 2014.  For coverage of Citi’s 2013 survey, see “Citi Prime Finance Survey Reveals Levels and Mix of Expenses Incurred by Hedge Fund Managers of Different Sizes, Firm Profitability and Margins, Use of Chargebacks and Impact of Regulations on Expenses,” Hedge Fund Law Report, Vol. 7, No. 1 (Jan. 9, 2014).

Participants at Eighth Annual Hedge Fund General Counsel Summit Discuss Terms with Institutional Investors, Seeding Arrangements and the Convergence of Mutual Funds and Hedge Funds (Part Four of Four)

This is the fourth article in a four-part series covering the Eighth Annual Hedge Fund General Counsel and Compliance Officer Summit, hosted by Corporate Counsel and ALM.  This article summarizes the primary points made at the summit relating to negotiating terms with institutional investors, structuring seeding arrangements and the convergence of mutual funds and hedge funds.  The first article in the series covered regulatory priorities, handling regulatory examinations and cybersecurity preparedness.  The second article discussed CFTC compliance, conflicting regulatory regimes in compliance programs and the regulatory and operational considerations of hedge fund marketing.  The third article covered insider trading, proposed changes to Form 13F and Schedule 13D and employment-related disputes with highly-compensated employees.  The HFLR has covered this annual event in each of the five prior years.  For our previous coverage, see: 2013 Part 3; 2013 Part 2; 2013 Part 1; 2012 Part 2; 2012 Part 1; 2011; 2010; and 2009.

Private Equity FCPA Enforcement: High Risk or Hype?

Extraction, engineering, pharmaceuticals and medical device manufacturers – FCPA prosecutors have already swept through these industries.  Are private equity firms next?  In a guest article, Laurence A. Urgenson, Joseph De Simone, Audrey L. Harris, Matthew A. Rossi, Matthew Alexander and Melanie M. Burke, attorneys at Mayer Brown LLP, assert that, using Dodd-Frank and the SEC’s new presence exams, the government may very well turn its attention towards the private equity industry.  They detail the enforcement landscape, the bribery risks for private equity firms (among other things: hiring practices, sovereign wealth funds, acquisitions and joint ventures) and best practices to mitigate those risks.  See also “FCPA Compliance Strategies for Hedge Fund and Private Equity Fund Managers,” Hedge Fund Law Report, Vol. 7, No. 23 (Jun. 13, 2014).

Former SEC Chief Accountant Jaime Eichen Rejoins Ernst & Young

Jaime L. Eichen, former Chief Accountant for the Division of Investment Management at the SEC, has rejoined EY as a partner in the Professional Practice Group with a focus on the Wealth and Asset Management sector.  For insight from Eichen, see “Top SEC Officials Discuss Hedge Fund Compliance, Examination and Enforcement Priorities at 2014 Compliance Outreach Program National Seminar (Part Three of Three),” Hedge Fund Law Report, Vol. 7, No. 9 (Mar. 7, 2014).  For commentary from other EY professionals, see “Critical Components of a Hedge Fund Manager Cybersecurity Program: Resources, Preparation, Coordination, Response and Mitigation,” Hedge Fund Law Report, Vol. 8, No. 2 (Jan. 15, 2015).  For coverage of a recent EY survey, see “Ernst & Young’s 2014 Global Hedge Fund and Investor Survey Considers Growth Areas for Hedge Fund Managers, Related Costs and Challenges, Operating Expenses and Cybersecurity,” Hedge Fund Law Report, Vol. 8, No. 2 (Jan. 15, 2015).